Stock Market Update: Investors Run from Risk Ahead of US Election


Stock Market Update: Investors Run from Risk Ahead of US Election

Market Review for Last Week

Global equity markets started the week flat, but accelerated their risk-off activities as uncertainties continued to add up for this Tuesday’s election.  The polls narrowed, and new information degraded the Clinton campaign.

Since FBI director James Comey announced the tape bomb last Friday at 2PM EST, the equity market has dropped 2.64% in 9 consecutive losing sessions.  That is a record since 1980, and last time 8 or more negative days happened was in 2008 amidst the housing bubble pop.

Volatility increased throughout the week, with the VIX index closing at 22.50, above levels we have not seen since post-Brexit.

One thing is certain next week – nothing is certain!  We will have the type of volatility traders love and investors are plagued by in their nightmares.

 

Weekly Market Scorecard

S&P500 Index: -2.10%

Oil: -8.60%

Dollar Index: -1.45%

T-Bond Futures (15-25 Yrs): +0.6% 

10 Year Bonds: +0.51%

Gold: +2.06%

 

 

S&P500 Weekly Market Chart

The SP500 is now below it’s 200 day moving average, and below the 50% fibonacci retracement at 2,092.  The 61.8% retracement is at 2,068.5 which is our first bearish target for the week, with the ultimate  target at 2,050 – but could be much lower if Trump wins.  Momentum is now showing some signs of temporarily being over-sold, but it can hang out in this zone for a long time.

All week, every rally that occurred was overwhelmed by sellers, pushing prices lower and lower as long term buyers were squeezed out of their trades and short sellers entered to speculate and hedge their positions.  We just had the type of week that annihilates the new traders account.  We hope everyone walked away unscathed and avoided the mentality to keep adding to long and wrong positions.

 

Presidential Election

Tuesday is election night, finally.  We cannot wait for this ordeal to be over already.  The polls are really tight and at this point, it is anyone’s guess who will be the 45th president of the United States.

In the last 9 days, hedge funds and institutional traders have been taking risk off the table (selling their stocks) or hedging their portfolios (shorting SP500 futures), which has caused downside pressure.

On Tuesday, one of two scenarios are likely:

  1. Hillary Clinton wins presidency – the SP500 market rallies 50 to 100 points over-night and closes at all time highs by Friday. Volatility, the US dollar and gold drop as all risk assets soar.  The Mexican Peso soars (you can trade this during the election).
  2. Donald Trump wins – the SP500 market tanks (Citi estimates as much as 13%), the US dollar and gold soar on flight to safety along with the Japanese Yen.  The Mexican Peso gets hit hard (long USD/MXN currency pair).

There is always the possibility that markets react in an unexpected way, as a Republican president is favorable for equities in a typical election.  But nothing about this election is typical.  It has become a farce, and outright ridiculous.  Hedge funds and the smart money are scared of the final result, and more so what follows.

What’s the choice at the end of the day?  A non polished and crude business man with unclear policies, or a career politician with no practical experience that could be indicted on criminal charges weeks after election?  No wonder the market is scared for its life.  The truth is this, no matter who wins, the future is full of uncertainty and will create some blockbuster trading opportunity.

Trading the Presidential Election

First and foremost for a news driven event, you need access to a quality news service.  Twitter won’t cut it, the market will be moving fast and in a very choppy and volatile fashion as it attempts to price in new information and poll results as well as results from state to state.

If you do not have access to a news service, you can sign up here by Monday at 12am and we’ll set you up on a 7 day trial for the same service professional traders use.

Also, we created a YouTube video on how to trade the presidential debates, and the same strategy can be used for the election.  Watch the video here on how to trade the market during the election.

If Trump Wins:

  1. Short the SP500 futures and add to trade on first 2 retracements, ride it down until you are happy with the profit and/or the movement seems exhausted.  If you miss most of the move, don’t chase it, a violent stop loss hunt is always possible in a thinly traded and volatile market.
  2. Long the USD/MXN currency pair and be patient, but don’t increase your risk if you are wrong.

If Hillary Wins:

  1. Long the SP500 futures and add to trade on first retracement, don’t be too patient with this position though, as the market will begin to realize that despite Hillary winning, she could be indicted, and this fear could overwhelm the joy of her winning.  Manage risk!
  2. Short the USD/MXN currency pair and play it the same as above.

 

 

The Market Predicts the Presidential Election

This chart from ZeroHedge shows that the market predicts how often the Incumbent Party wins based on it’s performance 86.4% of the time.

It is certainly an interesting table, but I think it’s just educational, nothing to get excited based on and start making assumptions that lead to trades.

 

 

 

Bottom Line

The market is obsessed with this election, and this will easily be the biggest news event of the week, month and most likely the year.  Don’t take it lightly, and whatever you do – DO NOT hold on to losers in hopes of them coming back.  This is a sure way to go broke.

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The information contained in this post is solely for educational purposes, and does not constitute investment advice.  The risk of trading in securities markets can be substantial.  You should carefully consider  if engaging in such activity is suitable to your own financial situation.  TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.